April 26, 2021
As our post-pandemic world evolves, one thing seems clear – we are encompassed in what’s called Modern Monetary Theory (MMT).
The concept behind MMT is debt doesn’t matter for those issuing the world’s reserve currency. In MMT, the only thing that matters for these powers is inflation. If it’s low, let the money flow. If it rises, it could be time for a pullback.
This general philosophy has been the “rule” since the financial crisis of 2008-09. From then until now, the Federal Reserve responded with quantitative easing and created trillions in new money.
That means higher inflation, right?
Traditional theory says more money chasing the same purchases leads to higher prices. And there’s more money in the system today than ever, with a quarter of it all printed within the last year.
At the same time, the Treasury exploded its balance sheet to nearly $28 trillion from about $6 trillion in 2000. The Fed has also ballooned its balance sheet from under $1 trillion in 2002 to $7.4 trillion at the end of last year.
But we haven’t had any inflation. Or at least that’s what the government tells us.
We’ve never seen this situation, not even during World War II when we took on the largest debt in the nation’s history (at the time) to finance the war. This unprecedented growth in the money supply should have already resulted in higher inflation, but it hasn’t.
Usually, when Americans earn, they spend too. But surprisingly, over the past year, several stimulus checks have beefed up savings or paid down debt, not been spent on goods and services.
But with everybody being cooped up, there’s supposedly pent-up demand. If that leads to spending, we could see significantly higher inflation. And that’s never good for the market.